Zalando SE

XETRA:ZAL

Earnings Call Transcript 2020-Q2

[Operator]

Dear ladies and gentlemen, welcome to the conference call of Zalando SE regarding the publication of their Q2 results 2020. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Patrick Kofler, who will lead you through this conference. Please go ahead, sir.

[Patrick Kofler, Teamlead Investor Relations]

Good morning, ladies and gentlemen, and welcome to our Q2 2020 earnings call. After pre-releasing some of the figures already, we are now able to show you the full results of Q2 2020. My name is Patrick Kofler. With me today is our CFO, David Schröder. As always, this call is being recorded and webcast live on our Investor Relations website, and a replay of the call will be available later today. David, the floor is yours.

[David Schröder, CFO & Member of Management Board]

Thanks, Patrick, and good morning, everyone. Today, we would like to provide you with a business update, we would like to look at our financial performance for the first half of 2020, and we would like to discuss our upgraded outlook for the rest of the year. Before we dive into the details, let me start by saying that we are overall very happy with our strategic progress and business performance in the first half of 2020, especially given the extraordinary circumstances that we've seen in the past months. We've proven the strength and agility of Zalando in many ways. We've come out of the first wave of this pandemic much stronger than we went into it as a result of our strategic clarity, our strong partnerships and an extraordinary team effort.I would therefore like to take this opportunity to once again thank all our teams for their great contribution, especially those who have been on the front lines to serve our customers during this critical time. The dedication, the focus and the support that our teams have shown has truly made a huge difference for our customers, our partners and our business. Most importantly, it has put Zalando in a strong position to tackle the rest of the year and to further accelerate on our journey towards becoming the starting point for fashion.This is also reflected in the 4 main messages that I would like to share with you today. First, we see continued, and in some key areas, even faster progress on our strategic agenda to become the starting point for fashion, supported by an accelerated offline to online shift, driving record numbers of new customers and partners to our platform. Second, we delivered a strong financial performance in the first half of 2020, driven by a faster-than-expected recovery in demand and underlying changes in customer behavior. Third, we have further strengthened our balance sheet by successfully placing EUR 1 billion in convertible bonds, allowing us to further accelerate our growth strategy and to invest through-cycle with even more conviction. And last, but not least, on the back of our strong performance in the first half of this year and our revised plans for the second half, we've upgraded our full year 2020 guidance as we are back on track to deliver strong and profitable growth for the full year. We will dive deeper into all these points during the presentation.Let's now first start with a strategic update. In our last earnings call in May, we talked a lot about the steps we have taken to successfully navigate through the crisis and to become part of the solution for the fashion ecosystem. We have realized at a very early stage of the pandemic that our starting point for fashion strategy has become even more relevant, as the needs of our fashion consumers and brands are very much aligned with the key building blocks of our strategy.Let me now remind you of the 3 strategic priorities we talked about ever since we communicated our strategy at our Capital Markets Day in spring 2019, and which we also reiterated again at the start of this year before COVID-19 hit Europe. Our first priority remains to deepen customer relationships. We want to play an indispensable role in the lives of our customers, and we will achieve this by building an even more attractive, inspiring and engaging destination. We measure our success by the health of our customer cohorts, by the share of wallet and the resulting customer lifetime value. Our second priority is to grow our active customer base. We want to be relevant to a broad audience in Europe as evidenced by the ability to attract new customers to the platform and retain existing ones to continuously increase our active customer base. Our third priority is to drive the platform transition. We want our customers to enjoy endless choices, and we want them to say, "If I cannot find an item on Zalando, it probably does not exist." In order to get there, we aim to build a highly scalable infrastructure of technology, data and logistics that all brands can leverage to reach European consumers with their content and products. Let me now provide you with some more details on the progress with regards to these priorities. Starting with our strategic priorities to grow our active customer base and to further deepen our customer relationships, we observed strong progress in the past quarter. During this time, more than 3 million customers shopped at Zalando for the very first time, contributing to the strongest year-over-year active customer growth since 2013, with an increasing share of first-time online shoppers and mail customers. As a result, we now proudly serve more than 34 million customers across Europe. When looking at the quality of this new customer cohort, we see that it shows very similar or even slightly better characteristics compared to previously acquired cohorts, as indicated by their engagement, their reorder behavior and their spend with us.Furthermore, recent customer service have confirmed our customers' intention to shop at Zalando again, even as offline retail slowly returns back to normal. To give our customers even more reasons and ways to engage with us in the future, we are currently working on a series of new exciting experience releases. As previously announced, one of these new experiences will be the introduction of our new pre-owned fashion category to our main Zalando destination. This will enable customers to give their fashion items a second life by selling them directly to Zalando quickly and effortlessly, and will also provide them with a highly curated, quality checked and convenient selection of items available for purchase. We will launch this and other exciting experience over the coming months.These new experience releases present major strategic milestones in our multiyear journey to establish deep, long-lasting customer relationships in order to realize our vision to become the starting point for fashion. Stay tuned for more to come in the following months.With respect to our strategic priority to drive the platform transition, we shared 4 focus areas for 2020 with you at the beginning of the year. The first one is to continue to internationalize the Partner Program. Between April and June, we saw more than 900 country launches of existing partners in markets outside of Germany, with 80 of them leveraging Zalando Fulfillment Solutions. As a second focus area, we aim to win even more partners to join our platform. During Q2, a record high 180 new partners signed up for the Partner Program and will start to trade soon. Thirdly, we wanted to further drive our partner-facing logistics service, Zalando Fulfillment Solutions, to allow partners to leverage our European logistics network to increase their customer reach and satisfaction, while at the same time reducing complexity and cost. Over the course of the past quarter, Zalando Fulfillment Solutions grew by more than 180% year-over-year, and we recorded a 50% share of partner items shipped for the first time ever towards the end of the quarter. As a result of the strong underlying momentum as well as these key initiatives, our Partner Program, GMV, grew more than 100% over the past quarter. Furthermore, we observed a strong traction of our Connected Retail program, connecting offline stores to our platform, which achieved a GMV share of 5% in Germany with its 1,800 active stores, contributing successfully to the strong overall performance of our Partner business.Going forward, we expect to benefit from a fourth initiative that we announced back in February, a new generation of data-driven tooling as one of the future growth drivers of our Platform business. I am happy to announce that we just launched our new partner portal, Zalando Direct, which will serve as a main entry point for all our partner-facing tools and services going forward. This represents a major milestone for us on our way to become a fully integrated platform for our partners and will help them maximize the sales opportunity on Zalando. The new portal and its tools aim at providing a sales service environment for partners to manage every step of their journey on the Zalando platform. The key steps are, first, an improved onboarding flow that reduces operational barriers to entry to the Zalando platform by building an onboarding process that is capable of scaling with any partner size and type. It supports the high level of process automation to remove manual work and creates transparency throughout the process. The new functionalities will help to drive down time to integrate and time to online. Next, the portal will come with a powerful suite of data-driven products that enable partners to completely manage the entire season, right from budget and assortment planning to in-season merchandising, all the way to end-of-season overstock management. We will provide benchmark data and KPIs to elicit partners to continuously outperform in the quest for customer attention.Last, but not least, the new tools will enable brands to enhance discoverability and visibility, empowering partners to improve their overall brand presentation and engagement. Our Zalando Marketing Services integration enables partners to drive targeted content and directly engage with customers contributing to fully immersive experiences on Zalando. The first set of functionalities was already made available to our more than 500 partners. In the upcoming months, we will roll out additional tools and functionalities to our partners. This concludes our strategic update. Let's now have a look at our financials in the first half of 2020.Starting with top line. Group top line growth in the first half of 2020 was very strong, with GMV growing by 25.1% year-over-year to EUR 4.7 billion, tracking at the high end of our midterm target corridor of 20% to 25% growth. I would like to particularly highlight that we were even able to accelerate our growth to 33% in Q2, driven by a faster-than-expected demand recovery and an accelerated channel shift. Over the past 6 months, we doubled our Partner Program GMV compared to the prior year. This also explains, to a large extent, the degree -- to a large degree, sorry, the gap of around 5.5 percentage points between GMV and revenue growth, which is particularly well pronounced in the DACH region.Now let's take a look at the development of each of those 3 segments. Our core sales channel, Fashion Store, saw a strong 18.8% revenue growth in the first half, driven by an accelerated shift to online and an outstanding performance in rest of Europe. The strong demand was mainly supported by re-acceleration of traffic growth as well as an exceptional new customer growth over the past few months as a result of an accelerated channel shift from offline to online. Q2 particularly benefited from the pent-up demand from the first quarter shifting into the second quarter as consumers held off making purchases when the pandemic started.In terms of regional development, the DACH revenue growth showed a solid 12.8% year-over-year increase and particularly benefited from the platform transition, recording more than 20% GMV growth in the same period. With almost 25% revenue growth in the first 6 months of the year, Rest of Europe continues to outperform DACH by 11.7 percentage points. Growth was particularly strong in Southern Europe, which had been hit hardest in the early weeks of the pandemic, but then showed a fast recovery and even stronger shift towards online, allowing us to significantly grow our customer base in France, Italy and Spain. In addition, we saw a truly outstanding performance of our Offprice segment in the first half of 2020, recording revenue growth of 49.4% year-over-year, up 24.9 percentage points year-over-year, driven by our flash sales destination Zalando Lounge. The success was primarily driven by the strong organic demand of customers who have an affinity for bargain hunting and was additionally fueled by good stock availability.Conversely, our Other business segment is still impacted by a negative baseline effect and muted demand for ZMS as a result of the pandemic. As discussed in previous earnings calls, over the past quarters, our private label activities, which had historically been reported as part of our Other business segment, were significantly downsized in Q1 2019 and are no longer reported in the Other segment but are now part of the Fashion Store. As a result, the Other segment has been declining in H1 compared to last year, with no impact on group level sales since it only affected internal inter-business unit revenue. Adjusting last year's results for our private label activities would have resulted in a pro forma revenue growth of 4.5% in the first half of 2020.Looking more closely at the last few months, Zalando Marketing Services, which is among the businesses we report in our Other business segment, had to cope with a COVID-19 related negative demand impact as brands cut back on their marketing investments in the short term to protect their cash position and bottom line. However, we now see demand returning in preparation of the upcoming fall/winter season and, therefore, remain confident around the long-term opportunity of this key platform service.Looking at our key customer metrics. We generally see a positive trend on all of them. Site visits increased 31% year-over-year, showing an accelerated growth of 8.3 percentage points quarter-over-quarter. Site visits even exceeded those of our fourth quarter 2019 peak trading period, which so far had been the quarter with the most site visits, given that Cyber Week and Christmas usually attract the highest traffic within a year. Active customers grew also faster than in the past few quarters, surpassing 34 million in Q2, fueled by a strong new customer intake. We had 5.8 million additional active customers year-over-year, the highest year-over-year growth since 2013, which is truly outstanding from our perspective.Customer order frequency remained at its all-time high of 4.7 orders per active customer over the past 12 months, which is a great result considering the significant inflow of new customers over the same period. Average basket size showed a positive development as well, showing a small 0.3 percentage uplift year-over-year. The major drivers behind this development were a change in product mix as well as the temporary decrease in return rate, partially offset by a lower average item value as a result of a change in product mix.Overall, these order frequency and basket size developments have led GMV per active customer grow by more than 3% over the last 12 months.Turning now to profitability. Our absolute profit as measured by adjusted EBIT increased by EUR 5.1 million year-over-year to EUR 113.3 million, primarily driven by an outstanding Q2 performance with an all-time high adjusted EBIT of EUR 211.9 million and a record high margin of 10.4%, fully compensating the significant hit we took in Q1. Relative H1 profitability came in slightly below last year, mainly driven by a lower gross profit, as we will see on the next slide.Overall, when putting the latest results into perspective and the challenges we were confronted with, we are very satisfied with what we've achieved in the last 6 months, thanks to our decisive corona response and the focused execution of our platform strategy. Additionally, profitability was supported by a temporary reduction in return rates as a result of a shift in category mix with a higher share of need-based categories as well as a strong increase in new customers.When looking at the regional profit distribution, we can see that our mature markets in the DACH region were able to increase their absolute as well as their relative profitability levels. Furthermore, we managed to steer Rest of Europe close to breakeven for the first half of the year, which is quite an achievement given the record-high loss in Q1. However, when looking solely at the second quarter performance for Rest of Europe, both absolute profit of EUR 74 million and relative profitability of 7.3% increased strongly year-over-year.Last, but not least, Offprice and Other businesses also strongly increased their profitability both in absolute and in relative terms. Let me now give you more detail on the main effects that led to the positive development of profitability so far this year. First, our gross margin declined 2.5 percentage points year-over-year in the first half of 2020, driven by country and product mix effects. For example, we had a higher share of basics, sports, kids and beauty, as well as a large share of sales via our Offprice business and the exceptional inventory write-down of EUR 40 million in Q1, which has only been partly reversed in Q2. Second, our fulfillment cost ratio improved year-over-year as a result of higher level of utilization and, therefore, also improved efficiency across our logistics network and improved order economics benefiting from a lower average return rate. Third, our marketing cost ratio decreased year-over-year, mainly due to our saving efforts as we adjusted our marketing approach at the beginning of the quarter by shortening the investment horizon for our ROI-based personalized marketing. With the demand recovery observed in recent months, the marketing spend, especially for personalized marketing, has been ramped up again in the latter half of Q2 back to pre-COVID levels with a longer investment horizon of up to 720 days to capture the full opportunity arising from the accelerated channel shift. And fourth, admin costs improved year-over-year as a result of increasing economies of scale, continuous product improvements and ongoing savings and cost efficiency measures, both on a half yearly as well as on a quarterly basis.Turning to cash-related items now. We recorded a negative, but increased working capital year-over-year. The main driver behind this development was the relatively higher increase in inventories and receivables than in payables, reflecting lower marketing investments during Q2 than last year as well as earlier payments of supplier invoices. CapEx spending is in line with our plan, but below last year's level as a result of our revised CapEx plan for 2020, as communicated during the Q1 earnings call in May. Mainly due to the strong operational performance as well as lower CapEx, we recorded a positive free cash flow of EUR 39.9 million for the first half of 2020, up from EUR 8.1 million in the prior year period.As we conclude the section on quarterly financials, let us take a look at the development of our liquidity position. Thanks to our positive free cash flow development in the first half of 2020 as well as our proactive drawdown of EUR 375 million from our general-purpose revolving credit facility, we could increase our strong liquidity position. As a result, our cash balance at the end of the first half amounted to EUR 1.38 billion. Additionally, we made use of the current favorable capital market conditions in recent weeks and successfully placed 2 tranches of unsubordinated unsecured convertible bonds with an aggregate principal amount of EUR 500 million each. The transaction resulted in gross proceeds of EUR 1.4 billion, giving us access to liquidity of now almost EUR 2.4 billion. We are truly thankful to all our investors who have backed this transaction and have thereby helped to make it a success.We are convinced that we are only at the beginning of a dramatic and sustained shift towards online channels. With this capital, we are even more equipped to further accelerate the execution of our strategy, specifically the transition into a platform business model and to put more capital behind our investment opportunities and our growth conviction independently from external market conditions.Let us now turn to our revised outlook for the full year. Back in May, when faced with significant uncertainty with regards to the further evolution of the pandemic, we expected GMV and revenue to grow in the range of 10% to 20% and adjusted EBIT to be in the range of EUR 100 million to EUR 200 million. However, given the much faster-than-expected demand recovery and elevated profitability levels during Q2, we feel even more confident for the full year outlook as we continue to see consumer demand shifting towards online shopping in general and Zalando, in particular. We, therefore, upgraded our full year 2020 guidance as outlined in our trading statement on July 16.For GMV, we now anticipate GMV to grow between 20% and 25% for 2020, in line with both our performance so far in 2020 and our midterm ambition going forward. For revenue, we expect revenue growth to trail GMV growth as a consequence of an accelerated transition towards a platform business model and an increasing Partner Program share, resulting in revenue growth of 15% to 20%.For profitability, driven by a strong H1 business performance as well as our commercial and overhead cost savings effort, we raised our profit outlook and now expect adjusted EBIT in the range of EUR 250 million to EUR 300 million. We leave our guidance unchanged for cash-related items and continue to expect negative net working capital as well as CapEx of EUR 230 million to EUR 280 million to fund our continued investments into our European logistics network and into our technology platform.While our upgraded full year guidance reflects our general confidence and optimism for the rest of the year, 2020, for sure, continues to be a year of unprecedented uncertainty. Not only can we not foresee the future evolution of the global pandemic, but we also see an increasing amount of uncertainty and potential constraints on the supply side of our business as many brands have cut back on collections and production volumes to protect themselves against potential overstock risk. However, based on the resilience and agility we have shown over the past months and as our upgraded guidance certainly reflects, we are confident to reach at least 20% GMV growth and a higher adjusted EBIT than last year, even in the event of a severe second wave of infections and a pronounced economic recession in Europe. In the absence of a second wave and driven by improved consumer confidence and the ability of sufficient supply -- the availability of sufficient supply in the market to meet demand, we would have the ambition to get closer to the higher end of this range.Before we conclude, I would like to briefly comment on current trading in the third quarter. Looking at July, we saw a strong end-of-season sale and continue to observe a healthy customer demand for fashion and lifestyle products. As a result, we expect Q3 to deliver GMV growth within the range of our full year 2020 guidance corridor of 20% to 25%. In terms of profitability, we continue to see tailwinds from a favorable return rate development, although at a much smaller and further diminishing magnitude, and thus expect Q3 2020 adjusted EBIT at an elevated level compared to the prior year period.Let me close the presentation by reiterating that Zalando has a clear strategy and a clear direction. At our Capital Markets Day last year, we shared with you our vision to become the starting point for fashion in Europe. Our key strategic priorities remain to grow our active customer base, to deepen customer relationships and to drive the platform transition. More than ever before, we are prepared to invest through-cycle and drive long-term value creation for customers, partners and ourselves. That concludes our presentation. Let's now go into Q&A.

[Operator]

[Operator Instructions] And the first question received is from Sherri Malek of RBC.

[Sherri Malek, Director of European Internet Research & Analyst]

I'll keep it to 2 questions, then. So firstly, could you elaborate on the rationale for the convertible bond issuance, given the quantum of cash already on the balance sheet? And if there is potential for M&A, could you comment on the type of opportunities that would fit to the current strategy? And then secondly, could you help us think about the impact lower returns has had on revenue and the bottom line as we try to model the reversal of that impact once shopping patterns normalize?

[David Schröder, CFO & Member of Management Board]

Sure. So as I already tried to elaborate during the presentation, I think the main reason why we pursued the convert is because we are really seeing that the opportunity, if at all, has become bigger and not smaller over the coming months. We've seen an acceleration in the channel shift from offline to online. More customers than ever before have joined our platform. And the same is also true for the partner side of our business. And therefore, we think it's actually time to play offense. It's time to invest with even more conviction into the growth opportunities that we have in our business and that we outlined in our strategy. And that was really the main reasoning behind pursuing this convertible bond offering. Since you alluded to M&A, I think it's important to point out that Zalando has grown organically ever since it was founded in 2008. And we continue, as I said, to see a very large market opportunity ahead of us that we will continue to focus on. And therefore, we will also remain focused primarily on organic growth in order to become the starting point for fashion in Europe. However, we also obviously do not rule out strategic opportunities that may arise. But I think we are not in a position at the moment to comment on anything beyond that given that we are really focused on organic growth. On your second question, on return rates, I think it's first of all important to maybe talk a bit more in detail about what we've seen. So as briefly alluded to in the presentation, I think the 2 main drivers especially behind this temporary return rate reduction that we've seen in the past months have been the category mix. So the shift of consumers from more occasion-based categories like dresses, which typically have a very high return rate to more need-based categories like beauty or sports, which also traditionally and historically have shown lower return rates. And this obviously then has also resulted in a lower return rate over the past months. I think the second key driver has been the customer mix as we've welcomed many new customers to our platform. We've also seen the pattern repeat that we've seen in the past, where new customers, when they try out our offering, typically show a lower return rate because they first of all want to find out how convenient it actually is to shop at Zalando and also to return at Zalando. And what we've seen in the past is that over time, those new cohorts then typically approach the return rates that we see from more seasoned existing customers. I think the third, but smaller effect has also been the country mix effect, where we've seen a slightly higher share of growth in countries with traditionally lower return rates and a diminishing share or smaller share of growth in countries with a traditionally higher return rates. Altogether, I think this has resulted in a higher single-digit percentage reduction in return rate, which obviously has benefited our bottom line in the second quarter. But as we've also commented a few minutes ago, we see that this effect is fading, the gap is becoming smaller and, therefore, we expect to return to the previous trend in return rates that we also saw pre-COVID, which actually showed slight improvements in return rate, driven mainly by our effort to reduce size-related returns, but definitely did not show an improvement of the magnitude that we've seen in the past months.Since you also asked on the effect of this benefit on both top and bottom line, I think it's important to point out that the return rate is not a driver of growth per se. So it makes our growth more efficient, but it hasn't created additional growth from my perspective. On the bottom line, it obviously has helped. So the single-digit improvement in return rate translates into a higher double-digit million improvement in terms of adjusted EBIT for the second quarter.

[Operator]

And the next question received is from Michelle Wilson of Berenberg.

[Michelle Wilson, Analyst]

First one, just on gross margins. Could you quantify the volume rebates from Partner Program that are going to the top line? I mean just give us some explanation of how that's developed year-on-year. And then just on the lower return rate point, just to confirm, there hasn't been any reversal of any provisions that might have flattered GMV growth in the quarter. Could you just explain the kind of accounting treatment around the return rate?

[David Schröder, CFO & Member of Management Board]

Sure. So in terms of the gross profit, since I heard that we might not have had the best audio quality when I was talking about the gross profit, maybe it's also worth to briefly repeat what I meant to say during the presentation. So gross margin over the first half of 2020 declined 2.5 percentage points, driven primarily by country and product mix effects. So higher share of basic sports, kids and beauty as well as a larger share of sales via Offprice and the exceptional inventory write-down of EUR 40 million that we've seen in the first quarter, which has only been partly reversed in Q2. In terms of the Partner Program effect, I think we do not specifically break out the effect that it has had on our gross profit. But as we've, I think, stressed in the past, it's fair to assume that the Partner Program overall is obviously rather benefiting our gross profit. It's important to note, however, that we've seen 2 developments in the second quarter that have made the benefit a bit smaller than in other quarters. One effect has been the very strong growth of Zalando Fulfillment Solutions, where, obviously, the gross margin is not as high as in the Partner Program, in general, because we essentially charge cost-plus when we sell our logistics services to partners. And the second effect has been the muted growth of Zalando Marketing Services, which, as you know, also has a -- even has the highest gross margin of all our partner-facing services. And therefore, we've definitely seen less of a tailwind from the Partner Program on gross margin than we would have seen without these effects. But I think in the long term, our thinking around the impact hasn't changed. So we still expect the Partner Program to be a key driver both of our gross profit, but also about our profitability in the long term.And then on the second question regarding what type of financial adjustments might have happened between the quarters, as you might have already spotted also in our half year report, we actually readjusted the GMV of the first quarter by EUR 39 million. So this has definitely been beneficial. But it doesn't really affect the view on the first half year overall, where we've reported 25.1% GMV growth, as you know.

[Operator]

Are your question answered?

[Michelle Wilson, Analyst]

Sorry, just -- I guess just the reversal of provision, I just wanted the quantification of the boost -- of half year GMV growth?

[David Schröder, CFO & Member of Management Board]

Yes. So I mean we have obviously had that GMV adjustment mainly for -- to account for the lower return rate, which we didn't anticipate to the full extent closing the first quarter. And then maybe the second item that is noteworthy is the reversal of -- partly reversal of the inventory write-down of EUR 40 million. There, we were able to reverse EUR 12 million in the second half -- in the second quarter this year.

[Operator]

And the next question received is from Andrew Ross of Barclays.

[Andrew Geoffrey Ross, Research Analyst]

My first question is just to dive in a bit more detail around current trading. I think you said you were expecting in your corridor of 20% to 25% for Q3. But could you give us a sense as to how July and the first bit of August is looking? Should we interpret that you're in the 20% to 25% zone? Or are you still above it? And maybe to follow up on that, if you could give us a bit more color around how Q2 looked between April, May, June and then into July, that would be very helpful for us to understand kind of what the impact of bricks-and-mortar reopening is and the pandemic are starting to moderate.

[David Schröder, CFO & Member of Management Board]

Sure. So on current trading, maybe before I provide a bit more color, I hope you also understand that it's already quite a step for us to give clearer quarterly guidance than in the past where we've mainly talked about the full year. We are not intending to disclose sort of monthly values in any form. I think what I can definitely say, however, is that the third quarter has started well with a strong end-of-season sale in July. August, as always, is a bit of a quieter period as many people are on summer holidays throughout Europe. And as you all know, September plays a decisive role in the third quarter given that this coincides with the start of the fall/winter season. And depending on how strong that season start develops, also partly influenced by external factors like the weather, I think we'll move within the range that I just communicated, between 20% and 25%.And then some more color on Q2. We've definitely seen a faster-than-expected recovery after those initial 3 weeks in March, where we saw a negative development year-over-year. So both April and May have been particularly strong in terms of growth. Towards the end of the second quarter, we have definitely seen a slight deceleration of our growth. And this is obviously also something that we take into account for our upgraded full year guidance. I think it's also something that we expected, given that there was this pent-up demand from Q1 once customers have spent what they didn't spend in Q1. Obviously, it's not to be expected that they keep going on the spending spree like never before. So I think that's something we anticipated. What we do not see, however, is that this deceleration is in any relation with off-line store reopening? So I think as you can clearly tell from our new customer growth, which by the way continues to be going in a very positive direction also in Q3, we have no indication whatsoever that the channel shift from offline to online is not continuing. It might not be as strong as we saw during the lockdown, where people didn't really have an alternative, but it's definitely continuing also after stores have reopened.

[Andrew Geoffrey Ross, Research Analyst]

Great. That's very helpful. Can I just clarify there, David, for July, you are ahead of the 20% to 25%, and you're being understandably a bit conservative around September, given it's an important month? Have I understood that correctly?

[David Schröder, CFO & Member of Management Board]

Very frankly, that sounds more like your interpretation than what I said. So I think I would like to stick to what I said, which is we had a very good start into the third quarter, and now we are obviously preparing for the season start in September.

[Operator]

The next question received is from Aneesha Sherman of Bernstein.

[Aneesha Sherman, Research Analyst]

My question is about ZMS. So at the start of the year, ZMS revenues were about 1% of GMV. Can you comment about how that's tracking given the slower progress this year? Are you still at about 1% as of the first half? And can you also share the penetration of Partner Program similar to the 50% penetration you reported for ZFS? And then my second question is, can you talk about what investments you're making into the growth of ZMS? Are you still matching partner investments? Are you still growing the team, et cetera?

[David Schröder, CFO & Member of Management Board]

Sure. So as I already mentioned during the presentation, I think ZMS has probably been the platform service that hasn't accelerated over the coming months. And I think there's a clear reason for that, right? So if you look at what we've done as a business, going into the crisis and dealing with the first hit, I think we basically challenged all our cost lines and cut spending wherever possible. And as you can see in our own P&L, we've particularly cut our marketing investments. And this is something that also our partners have done, of course. And therefore, in the case of ZMS, where we are offering marketing services, we've also seen this effect on our business. And this is something that other businesses have reported as well, right? So for example, I think even Google recently reported a year-over-year decline in ad revenue. So we are, I would say, in good company with the overall online advertising industry here. It's really not an unusual development at all. What's most important for us, however, is that the ZMS team is now getting very positive signals for the fall/winter season. So demand from partners is definitely returning. We see strong campaign bookings for the season start for new product launches and also for branding campaigns. But we also see a strong interest in more performance-related campaigns in the second half of the year. And therefore, we also expect ZMS to return to strong growth in the second half, while we also stay very confident on the long-term prospects, as I said.In terms of ZMS investments, obviously, since we still see this as a great long-term opportunity, we keep investing particularly in the product. So one of the recent additions has been that we are now also offering in-catalog ad placements in the app, which formally was only available on our website. This is something that increases our ad inventory and also presents our partners with additional opportunities to reach consumers. I think the second thing that we are currently working on and that we are very excited about is the introduction of our Z-type customer segmentation, so essentially a way for brands to do more audience-based marketing on our platform, targeting specific consumer segments. This is something that will further drive the effectiveness and efficiency of the marketing investments of our partners, and therefore, will also play into the long-term success of ZMS.

[Operator]

And the next question we received is from Volker Bosse of Baader Bank.

[Volker Bosse, Co]

Volker Bosse, Baader Bank. Congratulations, and thanks for all the provided details so far. My questions would circle around Connected Retail. Perhaps I missed it, but how many stores are connected currently? And what the target at end of year? And you recently also announced to internationalize your Connected Retail approach. So how is the demand from abroad retailers so far to join the program?

[David Schröder, CFO & Member of Management Board]

Sure. Happy to provide more color on Connected Retail. For sure, that has been one of the most exciting stories that we've seen develop over this pandemic. And I think we are particularly happy that Connected Retail presents us with an opportunity to also be part of the solution for the whole fashion ecosystem and sharing the success that our platform has been able to generate with some of the players that have been struggling over the past months, which has been, obviously, particularly the case for offline retailers. By now, we have around 1,800 stores actively trading on our platform. And we've also recently rolled out the Connected Retail program to more countries. So it was already live in Germany and the Netherlands, when the pandemic started. And in recent weeks, we have now also launched in Spain, Poland and Sweden. Given that we are only live for a few weeks, I think it's a bit early to tell how exactly the demand will develop in these markets. But we wouldn't expect it to develop any different from the more mature markets like Germany. And the early talks that we've had with partners in these countries also point into that direction.

[Operator]

And the next question received is from Charlie Muir-Sands of Exane BNP Paribas.

[Charlie Muir-Sands]

I just have 1 remaining, which is, could you just go back and elaborate a little bit more on the dynamics on the year-on-year margin evolution between the DACH region improving and the Rest of Europe region seeing a margin decline? And also if you could talk about what the principal parts of the margin bridge are between the 2 regions now? Is it still predominantly the gross margin, which is much better?

[David Schröder, CFO & Member of Management Board]

Sure. So I mean maybe looking at the bigger picture first, and as explained during the presentation, I think we are -- actually, we're very happy with how both regions are developing. I think in DACH, we've recorded one of the strongest growth rates in recent history, and we've seen an exceptional growth of our platform business, as evidenced by the strong -- by the significant gaps between GMV growth and revenue growth. And that also combined with an increase in profitability from our point of view is just exceptional. On Rest of Europe, I think for us, it's great to see that after a very turbulent first half, to say the least, we are very close to the target that we also shared with you at the beginning of the year, which was to steer rest of Europe around breakeven, while maximizing the growth opportunity that we have in these countries. So if you look at the first quarter, obviously, Rest of Europe was particularly hard hit, which is no surprise given that Spain and Italy, for example, were among also the countries that were hardest hit by the pandemic, and that's why you obviously saw a very negative bottom line impact in the first quarter, which however then was almost compensated by the strong development that we've seen in the second quarter where those countries recovered very quickly and also contributed to a great degree to our customer acquisition success. So as mentioned, Spain, Italy and France are also among the countries contributing most to our 3 million new customers acquired during the second quarter. And therefore, we are actually very happy about how Rest of Europe is doing, right? Maybe to add one more data point even, if you look at the GMV growth of the Rest of Europe region in the second quarter, you are seeing 34% GMV growth, which obviously also shows, once again, how fast we are able to grow our business in this part of Europe.Coming to one other question you asked around how the P&L, in general, compares between the markets? I think one major difference is, obviously, the size of the investment that we are deploying in these markets. So what you will see, if you look at the P&L for DACH versus Rest of Europe in more detail, it's particularly that the marketing investment is much more geared towards Rest of Europe where we are also then getting a return for that investment in terms of acquiring lots of new customers. And that's obviously then drawing down the profitability of Rest of Europe compared to DACH. But as we have shown in the past, as soon as our customer base becomes more mature and as soon as we are able to establish deeper and deeper relationships with our customers, we can also reduce over time the level of marketing investment and thereby also grow the profitability of that region over time. So I think we -- with the numbers we see, we are very happy, and we are also very confident about the long-term trajectory.

[Operator]

The next question received is from Anne Critchlow of Societe Generale.

[Anne Critchlow, Equity Analyst]

I've got 2 questions, please. The first one is on marketing cost, fulfillment cost and admin cost. Could you give a bit of a steer on how you expect those 3 lines to balance as you go into the second half? And the second question is really about the category shift that you're seeing, if you are. So how are the occasion where categories are recovering now? What did you see during Q2 and beyond into July on that?

[David Schröder, CFO & Member of Management Board]

Sure. So maybe starting with the cost line question and looking ahead sort of into the full year results that we expect to deliver. I think on the marketing cost, as explained during the presentation, we have had a period with very much reduced spending and -- as an immediate reaction to the early weeks of the pandemic. And then towards the end of Q2, we've come back to prior spending levels, investing into the long-term opportunity that we see in acquiring new customers under the special circumstances. And therefore, for the full year, we actually expect marketing costs to normalize and to approach last year's levels.On fulfillment costs, yes, we've seen a strong benefit in the past months, especially due to the return rate development, which went in our favor. As previously mentioned, we see that this temporary effect is fading. And therefore, we would still expect fulfillment costs to benefit on a full year basis, but not to the same extent that it benefited in the past months.And then on admin costs, for sure, as in past years, it remains our ambition to create economies of scale and operating leverage. And this is something that is also supported by some of the savings measures that we have put in place and that are still in place, at least to the extent it makes sense. And that's why on the admin cost line, we also expect an improvement year-over-year. And all this has obviously been factored into our upgraded full year guidance of EUR 250 million to EUR 300 million adjusted EBIT.On the category mix and the shift that we see. We obviously have seen a pretty strong shift especially in the early weeks and months of the pandemic. What we've recently seen, however, and that's, I guess, no surprise, that as measures become more lenient, as people are able to travel again, as people are going out to restaurants again in many parts of Europe, also the category mix is slowly returning back to normal. And for us, that's obviously great news because we obviously want to go back to obviously more normal life for our customers and also ourselves. But also, we want to be able to show them the full breadth of our assortment, which also obviously includes exciting areas that are more occasion-driven. And therefore, it's great to see that also those categories are now recovering.

[Anne Critchlow, Equity Analyst]

Could I ask a follow-up question on beauty. Given that beauty was one of the stronger categories during the pandemic, do you think there's been a permanent shift in behavior to ordering beauty online?

[David Schröder, CFO & Member of Management Board]

Well, I think we can even generalize that question, right? So we have seen a stronger shift from offline to online across all categories, not only beauty. And the indications that we have so far, both from customer surveys, but also from internal data, definitely point into the direction that it's a more sustained shift. That's not saying that people will stop offline shopping, of course. But we definitely have made the experience that once customers start to shop on Zalando, they also continue to shop on Zalando and they shop more over time. And therefore, I think we are actually also very excited about what that means for the prospects of the beauty category, which has been one of the categories showing the strongest growth, actually triple-digit growth year-over-year, and where we were now also able to record more than 1 million customers who purchase beauty from our platform cumulatively so far. So I think both these numbers give you an indication of how beauty is going and obviously also mean that we'll continue to invest into building the success of beauty going forward. So maybe to mention a few highlights. Especially for the coming months, I think there's new launches coming up with different brands from Coty and L'oréal Luxury, for example, which should further allow us to extend our offer, which by now already consists of 12,000 products from 300 brands. So I think we are becoming a more and more credible beauty destination for customers, and that should also lead to an even higher demand in the future.

[Operator]

The next question received is from Simon Irwin of Crédit Suisse.

[Simon William George Irwin, Director]

And can we just go back to the initial comments you made about the convertible cash raise. And 2 things around those comments. First of which, can you envisage a situation in which the fundamental design of the logistics network would need to change? And I assume that, that really means that the same-day delivery becomes much more important rather than next day.[Foreign Language]

[David Schröder, CFO & Member of Management Board]

Sorry for that. So I think I got the first question on the logistics network, Irwin?

[Simon William George Irwin, Director]

Yes. So one is on the network. And the second then, just would be around comments you've made in the past about wanting to extend into premium. And it's kind of how much luck you had with extending into premium in terms of getting new brands? Or whether you think that to do this properly would require a different approach and maybe a different sort of platform?

[David Schröder, CFO & Member of Management Board]

Sure. So I mean if I think about how we expect logistics to develop, we definitely think that consumers will demand more convenience, more speed, but also more sustainability in the future. And I think that with the design that we are pursuing with our network, we are actually able to cater to these needs, not only today, but also going forward. So as you know, we've invested quite a lot in building out our network across Europe with by now 11 sites across 5 different countries and more to come. As, for example, our next-generation logistics hub in the Netherlands will open next year. And this is something that gives us the ability to serve customers, especially in those regions where we have those hubs, which is by now mainly in Central Europe and Southern Europe and Northern Europe and Eastern Europe. And will then be also the case in Western Europe once we have the Dutch hub with more speed and convenience. In addition, I think we are also, as you know, building up what I would call a network of micro hubs with our Connected Retail program, which we then couple with our local delivery networks to enable a very fast and convenient delivery. So I wouldn't expect the same-day delivery in our vertical to necessarily become the new norm because there are not so many fashion emergencies I can think of, but we definitely think it's important to have that type of offer for customers. And therefore, we obviously invest into the Connected Retail program not only as a way to increase the offer on our side but also as a way to give us additional options to fulfill customer demand faster and also more sustainable given that the stock is really around the corner from where the customer is ordering.And then the second question on premium. We think, and I would also argue that we've shown that this is possible that we can play a great role in offering beauty on our existing destinations. I don't think we need a separate destination to be successful with premium. I actually would rather argue that one of the main appeals of our platform is that we can expose premium and luxury brands to the next generation of shoppers, which might not find their way into a luxury boutique, but certainly find their way to Zalando. And this is also supported by the data that we've been seeing over the past months. So for sure, premium was also hit in the early weeks, but then it recovered very strongly in the last months, and we continue to see the largest demand coming from younger customers, which are particularly interesting for these brands. And therefore, we also see a continued high interest from these brands to join our platform.

[Operator]

And the next question is from Rocco Strauss of Arete Research.

[Rocco Strauss, Analyst]

David, 2 actually left for me. I believe you're actively hiring tech talent for zDirect right now. But could you touch a bit more on how zDirect will help scaling Zalando Media Services meaningfully from here with zDirect, obviously, enabling the marketing departments of brands to utilize the data analytics through the newer tools? And secondly, could you touch on the development of items per basket especially driven by MOVs and the increasing share of Zalando Fulfillment Services.

[David Schröder, CFO & Member of Management Board]

Sure. So on the first question regarding zDirect. I think the main benefit of zDirect really is that it makes the interaction with Zalando much more seamless for brands in a way similar to what we want to do with our destination for consumers having their starting point for fashion. We also want to offer sort of a one-stop solution for partners. And that's really what Zalando Direct is about. I think what it can do in terms of helping scale both the Partner Program in general and also Zalando Media Services, in particular, is that it just makes it much more easier to interact with us, and that it also provides much more insights and transparency to partners on what and how they perform and what levers they have to increase their performance. So we'll expose them to benchmark data, for example, where they can track their relative performance in certain categories, obviously, against an anonymous set of competitors, which can not only inform their decisions on how to position their products and collections, but can obviously also tell them where to invest their marketing spending with the highest possible return. And this is, I think, how you should look at it. So similar to how Google Analytics leads people to spend more on Google advertising, I would say that we will see a similar development as part of our overall partner-facing approach where the more insightful the data is that we provide them with, the more actionable it will become, and obviously, the more growth that will mean for partners and then also the services that we offer to them.I think in terms of items per basket, the main impact that we've really seen on our basket size has come from the return rate, and therefore -- yes, mainly the fact that we talked about, that customers take more deliberate purchase decisions and also shop different categories than in the past. I think there's no notable effect at least in recent months that we would attribute to the MOV, which we already introduced last year. There's really no major change from that. But obviously, we continue to see the same benefits that we talked about in the past. So customers typically then choosing to add an item to the basket to get free delivery without any negative repercussions on return rate. And then I think the growing ZFS share is not so much influencing the items per basket. It's more helping our items per shipment, right? So we can combine more items into the same shipment and need to ship less parcels per order. And this is then obviously something that is also reflected in the fulfillment cost line, which is improving, as you could see from the P&L we talked about earlier.

[Operator]

And the next question comes from Geoff Ruddell of Morgan Stanley.

[Geoffrey Frith Ruddell, Managing Director]

Can I ask 2 questions as well, please. The first 1 is bringing you back to the EUR 1 billion capital raise. You implied that it was likely to be needed for organic rather than M&A purposes. So I just want to understand it a bit more. Does that mean we should be expecting much higher levels of CapEx in future years? Or are there sort of loss-making activities you intend to undertake in order to grow the business for the longer term? I'm particularly thinking about expansion -- an aggressive expansion into the U.K. market. And then the second question is, could you just give us an update, please, on what proportion of the GMV in the second quarter was through the Partner Program?

[David Schröder, CFO & Member of Management Board]

Sure. So on the first question regarding implication of the capital raise on our midterm trajectory, I think what I would like to do is to reconfirm the midterm guidance that we've issued in the past, right? So I think the way to think about our future trajectory is still that we expect to continue to deliver strong, but also profitable growth of 20% to 25% on GMV. And then, as you know, for next year, we communicated a margin range of 2% to 4% as part of our platform transition period. And I wouldn't know anything to the contrary, which I could mention today. So this is still, I think, what you should assume going forward. Also on CapEx, I think we've said in the past that we expect to spend 4% to 5% of revenue on CapEx. Yes, we might see a certain catch-up effect from the lower CapEx spend this year. As you know, we have postponed several projects that we communicated at the beginning of the year. So for example, opening a satellite warehouse in Spain, which we communicated in February, but then postponed for obvious reasons. This is something that we might add to the CapEx plan for next year because we obviously continue to see the long-term potential for such a location. But otherwise, we would stick to the midterm guidance that we issued so far.On the proportion of the Partner Program, I'm sorry to disappoint you if I said that we do not reveal such shares on a quarterly basis. As in the past, we'll provide you with regular updates at least once a year on how the Partner Program share is developing. But as you can infer from the fact that we've communicated around 100% growth, even more in Q2, a bit less for the first half, I think you should be able to form a fairly good assumption on how the Partner Program is going.

[Operator]

And the next question is from Nizla Naizer of Deutsche Bank.

[Fathima-Nizla Naizer]

Just on the partners that you added in Q2, the 180 new partners that you mentioned. Could you kind of remind us how many partners you currently have? And the new partners, the 180 that you mentioned, what are they signing up for? Some color around what's most appealing to these partners would be great. Secondly, on accelerating your investments into the Partner Program in the second half, could you tell us how much of the margin in second half do you think you'll reinvest into the Partner Programs? And where are these investments going? Some color there would be great.

[David Schröder, CFO & Member of Management Board]

So on the partners, we've added 180 partners in the second quarter. Overall, we now count around 500 partners on our platform. I think the -- if you want to call it that way, sign-up pattern really hasn't changed. So they are excited about the opportunity on Zalando. They mostly connect to the Partner Program as such or to Connected Retail. And then many of them have started to couple this with Zalando Fulfillment Solutions because they just understand how superior is both in terms of customer proposition and also economics. And then once they are actively trading, they also start to try out ZMS. And then if they see that it works for them, they spend more and more over time. And that's, I guess, the pattern we've seen in the past, and that's also something that we see continue with this new partner cohort, which has been particularly strong.In terms of investments in the second half, I think I wouldn't want to quantify any direct impact on our margin. But obviously, our investments have been fully factored into our guidance for the full year. And I think the direction they are going into has also stayed fairly stable. So we continue to invest into our technology platform, particularly Zalando Direct. We'll also continue to invest into the key services behind Zalando Direct, so the Partner Program, Connected Retail, ZFS and ZMS. And last but not least, we'll obviously also make sure to increase our partner sales and hunting efforts because we see that these circumstances offer a particularly attractive time. And one shortage that we've actually seen in the second quarter was that we didn't even have enough people to talk to these partners because the demand was just overwhelming. And therefore, we'd want to be prepared to bring even more partners on board in the future and also to scale, for example, Connected Retail in all these new markets that we just launched.

[Operator]

And the next question is from Adam Cochrane of Citi.

[Adam Gareth Cochrane, Director]

In the interest of time, I'll make it one. In terms of the marketing costs, could you just confirm that you said that you'd expect the full year marketing sales to be flat on last year? Or was it that the second half would be flat on last year? Just a clarification on that. And then in terms of the marketing, you talked about the return to 720-day payback. Is that something where, given the advertising costs, et cetera, are lower, as you mentioned, should we see that deliver an acceleration in active customer growth? Or that just offset some of the shift that we see because of COVID as you look into the second half normalizing?

[David Schröder, CFO & Member of Management Board]

All right. So on the first question, happy to clarify. So we expect marketing costs to be higher again in the second half of the year to really capture the opportunity that we see. And as we -- obviously then also roll back the savings that we had instituted after Q1. And as a result, we would expect the full year marketing sales ratio to be sort of in line with last year levels.If we look at the return on these marketing investments, I think we've seen certainly a period in Q2 where we've seen exceptionally high returns due to also reduced cost per click. So there was a time of a few weeks where not many people were bold enough to advertise. And there, I guess, we could almost advertise like 10 years ago with little competition. Now I guess the situation has normalized again. Cost per click rates are sort of also back at more normal levels, and so are our returns on marketing. So still going for healthy returns also on the 720-day horizon. And this makes us confident that we are doing the right thing in scaling up our marketing investment for the second half.

[Operator]

And the next question is from Olivia Townsend of UBS.

[Olivia Townsend, Analyst]

I have 2 questions. One is a follow-up on the gross margin. I was just wondering if you could quantify any of the different parts of the H1 gross margin bridge, the split between promotion, mix and product, mix and countries, et cetera? Or at least any kind of qualitative comments you can make about what was the largest driver and what was the split between those different parts? And then the second question is just on average ZFS penetration during the quarter. Would we be correct in thinking that was around sort of low 40% with that peak of 50% at some point near the end of the quarter? And you mentioned in the presentation, you were saying about 80% of the existing partner brands that were internationalizing using ZFS, have you seen a similar level of demand for ZFS from those 180 partners that joined in Q2?

[David Schröder, CFO & Member of Management Board]

Yes. So maybe a bit, but really not so much more color on the gross margin. I think as commented in the presentation, one key driver definitely was the product mix -- the business mix, sorry, as we saw an exceptionally strong growth of our Offprice business segment, which operates with a lower gross margin. Obviously, we've also seen a negative impact on group level as a result. I think the second key effect has been the -- especially if you look at the full first half, has been the inventory write-down that we recorded in Q1. And then maybe a third effect worth mentioning has been that, obviously, as a result of overall strong demand for our platform, but overall low demand for the market, right, for the fashion market, for sure, overall, still seems to be declining, while we are seeing strong growth on our platform. We've definitely seen a higher level of promotional activity throughout the season. And this has also influenced discounting patterns for us. And we've seen higher discounts compared to last year, at least for quite a bit of the period. And this has also weighed on our gross margin. I hope that helps a bit to understand some of the underlying drivers. On ZFS, it's certainly correct that the peak that we reached for the first time in terms of more than 50% shipped via ZFS in -- on a weekly level is not something that you can extrapolate for the full quarter. So for the full quarter, we still operated more in the 40s. But since we talked a lot about the fact in the past that we want to reach for that 50% share over the course of this year, we obviously wanted to also tell you that we actually reached it for the first time, and we are now obviously focusing ourselves on making sure that this becomes more than average and less of a peak for us in terms of penetration.With the new partners joining our program, we definitely see a very strong interest in ZFS. And so I would expect that this for sure helps, just like the ongoing internationalization efforts via ZFS, obviously help the overall share to develop in the right direction.

[Operator]

And the next question we received is from Jurgen Kolb of Kepler Cheuvreux.

[Jurgen Kolb, Analyst]

2 questions. First, on the current situation in terms of excess inventories. Obviously, Lounge was very strong. So how do you see the current situation developing in the second half? What are you hearing from the brands and your ability to keep that growth also going into the second half? And here, specifically on Q4, when we talk about Black Friday, Cyber Week, how do you see these sale events developing this year? And in this respect also, you mentioned as a kind of a risk that the fall/winter products might not be -- or that the brands are cutting back on collection side. How does that affect your business? How do you think that's going to affect your business? Is that going to have a positive impact on pricing? Or how do you see that as a real risk and impacting your numbers?

[David Schröder, CFO & Member of Management Board]

[Audio Gap] the year. I think we were even on mute for a bit too long, so sorry for that. Let me start again. So I think what we have seen over the past months is that we've done a good job on inventory management. We moved ourselves into a much better position than we were in the beginning of the pandemic, where we had to do the extraordinary write-down. We were now able to partially reverse that. And I think we are in a good place with regards to our current inventory position and the inventory that remains on the spring/summer season. For fall/winter, I think the situation is almost reversed, right? So from what we are seeing, it could be the case that supply becomes really the new constraint for our growth. And therefore, we are very much focused on discussions with key partners to make sure that we can secure as much inventory as possible for our platform to benefit from the growth opportunity ahead of us. Many of the brands have become much more risk-averse and have cut back production volumes, have cut back collections for fall/winter and partially already also for spring/summer 2021. And I think what we are now doing is really trying to leverage the full power of the platform and all the different models that we can offer to brands, be it Wholesale, be it Partner Program, be it also Connected Retail, to make sure that we are essentially the place that gets most access to the stock, especially in a situation where it might become scarce. The impact on the business could be twofold, right? So I guess, in the positive case, where we are able to secure the stock for the platform, I think we would be the platform that still has a great offer for consumers, and that is also able to show continued strong growth. If it becomes harder to secure the necessary inventory, I think what we would expect to see is also less discounting pressure in the market overall because then, I guess, more and more players would more enter a yield management mode. And then we would at least benefit a bit probably on the bottom line. But I guess our preferred scenario is really the first one, where -- thanks to all the efforts that are ongoing, we can continue with strong growth throughout the second half.

[Operator]

And the last question for today is from Georgina Johanan.

[Georgina Sarah Johanan, Analyst]

2 for me, please. And the first one was just a clarification. You talked about a double-digit million benefit from lower returns rate on EBIT. Just to check, is that double-digit millions benefit sort of purely coming from the lower associated fulfillment costs? Or is that taking everything into account, for example, also a lower gross margin on that type of product mix? That was the first one. And the second one was just following up on Geoff's, I think, question earlier. You talk about sort of doubling down in terms of investment and really going on the offensive. And -- are there any particular markets where you're going to be sort of more aggressive going forward? And indeed, perhaps the U.K., any comments on whether the U.K. is going to be one of those, please?

[David Schröder, CFO & Member of Management Board]

Yes. So on the first one, the EBIT impact, I mentioned, in terms of the return rate benefits, really combines all effects that we've seen. One major effect for sure is the fulfillment cost impact. I think another effect is just that more volume flows through the whole P&L. And yes, the overall benefit adds up to this double-digit million amount.In terms of where we or how we want to play offense when looking at different markets, I think our view really hasn't changed here. So we aim to strengthen our leading position or get to a leading position in every single market we operate in. In some markets, we are already quite advanced. In some other markets, we still have some room for improvement. So I think it's not a secret that in the U.K. we are not really where we would love to be. And therefore, I guess the U.K. is certainly also one of the markets that we are considering for additional investment. But the same is true, as we've talked about for many other markets in the Rest of Europe bucket where we just see tremendous growth opportunity ahead of us. And also for our more established markets in DACH, where I think also this quarter has shown that even though the market might be more mature in a sense than some other markets, given that that's where we started, we still have great opportunities. And therefore, we'll also continue to invest even in these markets.

[Operator]

As we receive no further questions, I hand back to Patrick Kofler for closing remarks.

[Patrick Kofler, Teamlead Investor Relations]

Yes. Thank you, everybody, for joining. As I said, overall, we are very happy with our strategic process and the business performance in the first half 2020. If you have any further follow-up questions, do not hesitate to contact us. Otherwise, we wish you a wonderful summer and stay healthy. All the best. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.